During its earnings release a couple of weeks ago, Pandora Media’s (NYSE:P) shares sank as results were unable to meet the lofty market expectations and Q4 guidance turned out to be more conservative than analysts expected. (See article Pandora Falls Short of Lofty Market Expectations, Revised to $9.50) The stock hasn’t lifted recovered to its previous levels then despite the broader market ticking higher. In the case of Pandora, it appears that there is a general concern among investors and analysts about rising competition and the ability of the company to be profitable. An analyst from BTIG has voiced his concern that the the company’s quarter-over-quarter registered user growth has started to flatten out and Pandora has not adequately explained whether this is a result of competition or a slow economy.  Pandora’s competition comes from Clear Channel Radio, Sirius XM (NASDAQ:SIRI) and Spotify, which is expanding via Facebook in the U.S.
On the profitability front, concern remains around the royalties that Pandora pays for the music hours listened by its user. The business model is such that fast user growth, if not well covered by advertising opportunities, will lead to high costs. It is inevitable that Pandora needs to either change its royalty model or better utilize the ad opportunities. Currently most users are listening to Pandora on their mobile phones. While mobile advertising market is expected to pick up, the ad dollars spent currently are much lower compared to other platforms.
On the service expansion side, Pandora announced that Ford (NYSE:F) will be adding its services to its 2012 truck models.  Pandora’s presence in vehicles is limited unlike Sirius XM, which relies heavily on being pre-installed in new vehicles. As the company tries to expand more on this turf, the competition will further intensify.
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Our price estimate for Pandora Media stands at $9.50, implying a discount of about 10% to the market price.Notes: